Lear Focusing on Seats, Electronics

As GM scales back its interior integration strategy, Lear wants to scratch cockpits, door trim panels, headliners and acoustics from its product portfolio.

DETROIT – Lear Corp., which began life as an automotive seating supplier and over the past decade expanded its portfolio to include complete interiors, is returning to its roots.

The Southfield, MI, supplier is midway through its plan to consolidate or close some 25 plants – about half in Europe and half in North America – and the plan should be fully executed by the end of this year, Douglas DelGrosso, president and chief operating, tells Ward's here at this week’s Society of Automotive Engineers World Congress.

Central to the restructuring is Lear’s intention to depart interior segments in which the supplier is uncompetitive: instrument panels and cockpits; door trim panels; headliners and overhead systems; and flooring and acoustics.

Instead, Lear is focusing all its product energy on seats and electrical/electronic systems, such as remote keyless entry and wiring harnesses. Lear’s biggest individual component sector is seats, which make up about 65% of worldwide sales, DelGrosso says.

Like some of its competitors, Lear has been conducting its own consumer research to bolster that of auto makers. Armed with that data, Lear can tailor its products more successfully for the marketplace. The information also has fostered greater collaboration within Lear, DelGrosso says.

“It’s been a catalyst to get these somewhat independent groups to really engage each other – how to better integrate electronics,” he says. “We can’t really execute some of the seating technology without having some fairly sophisticated embedded electronics.”

At the urging of certain auto makers, primarily General Motors Corp., Lear aggressively set out to become a full-service integrator capable of designing, sourcing and delivering a complete interior for a vehicle.

Lear grew rapidly to support the strategy by making some 17 acquisitions in the 1990s. The most significant deal came in 1999 with the purchase of UT Automotive, for $2.3 billion. UTA gave Lear much-needed electronics expertise.

Last year, however, GM announced it had given up on outsourcing complete interiors to suppliers, moving many of its vehicle interior programs in-house. With GM changing direction, DelGrosso says Lear had to as well by returning to its core segments. GM is Lear’s biggest customer, generating 28% of the supplier’s 2005 revenues, according to the company’s annual report.

“Much of this total interior (strategy) was really to address what our major customers in North America were looking for,” he says. “They were looking essentially to outsource much of that activity. They’ve decided to go back to a more traditional sourcing strategy. That’s caused us to rethink how we respond to that.”

Lear’s seating and electronics operations largely have been unaffected by these customer decisions. As for the other product sectors, DelGrosso says Lear built up “a significant infrastructure, particularly in North America,” to support its customers. “We’ve had to dismantle that,” he says.

“On those types of products, we said maybe that’s better left to people who want to focus solely on that,” he says.

Last October, Lear formed a joint venture with investor Wilbur Ross’ private equity firm, W.L. Ross & Co. LLC, which likely will assume control of the assets Lear no longer wants. Lear has a 35% equity stake in the joint venture.

The venture is purchasing the European operations of bankrupt interior supplier Collins & Aikman Corp. DelGrosso says that sale likely will close this June, at which point Lear’s non-core facilities in Europe could be combined with those of C&A.

Eventually, DelGrosso says the plan is to combine Lear’s non-core assets in the U.S. with those of the bankrupt C&A.

“Yes, ultimately the plan is to bring them all together,” he says. “We think that combined business will perform better together than we would have independently.”

The timeframe for this transaction remains uncertain.

“What has been critical to the North American piece has been C&A,” DelGrosso says. “With C&A still in bankruptcy, we’re not 100% positive Ross will be successful in acquiring those assets out of bankruptcy. Assuming he is, our estimate for that timing would be the balance of this year, maybe in 2007.”

Lear has 57 plants or warehouses in the U.S. and Canada. The supplier finished 2005 with $17.1 billion in sales and a loss (before income taxes) of $1.2 billion. In 2004, the supplier posted pretax income of $550 million.

Lear’s difficulties stemmed largely from launches of new products for about 70% of its North American vehicle platforms, DelGrosso says.

“That had a huge impact on the overall financial performance of our business because we were in this continuous launch mode, and launch costs are significant,” he says. “We expect North America will get back to the level of performance we had in 2004. That will be step by step between 2006 and 2008.”

One of those major launches is GM’s GMT900 fullsize pickup and SUV platform. Lear is the sole supplier for seats for the entire platform, as well as some electronics.

Lear also supplies interior door panels for the platform, although the supplier wants to exit that business. DelGrosso says Lear’s asset consolidation should “give GM a better product at a better cost structure in the end than what they have today.”

Lear is exhibiting at the World Congress for the first time in six years. It is among several other Tier 1 suppliers, including Continental AG and Behr GmbH & Co. KG, returning to Congress this year.

They are clustered in the “OEM/Supplier Park” along with five auto makers: BMW AG, GM, Ford Motor Co., Chrysler Group and Toyota Motor Corp.

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